An Argument In Favor Of Bankruptcy

Jeffrey Miron, an economics professor at Harvard, argues in his article at cnn.com that bankruptcy, not a bailout, is the way to go.

A direct quote:

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses [sic] that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

It's a Deal

Early this morning, as most Americans slept perhaps restlessly in light of the current crisis, Congress came to agreement on a plan that has a little of what everyone was looking for: (1) big money injected quickly into the market (2) limits on golden parachutes for executives of failed firms (3) stock warrants for the government in return for the bailout (4) and as a nod to the House Republicans a market-based solution through insurance alternatives to the government buying distressed securities.

The details have yet to be put in writing, and that is the task for Sunday. Perhaps the market will know where things stand by the time the bell rings Monday morning. I have a feeling it will be years before we fully comprehend the effects of this momentous occasion.

More here at Breitbart.

Science as Art

With the turmoil of the financial markets making the headlines, good news can be difficult to find. This gem, however, deserves to be seen. The National Science Foundation (NSF) and the journal Science, created the International Science and Engineering Visualization Challenge to celebrate the tradition of enlightenment through illustration. "Some of science’s most powerful statements are not made in words. From the diagrams of Da Vinci to Rosalind Franklin’s x-rays, visualization of research has a long and literally illustrious history." NSF Challenge Synopsis. The Challenge honors scientists who use artistic mediums to enhance appreciation and understanding of scientific research. Monica M. Bradford, executive editor of Science said, "Science and NSF instituted this international competition to reward scientists for using visualization techniques to demonstrate the beauty and wonder of science."
The competition is in its sixth year, and there are five categories: photography, illustration, informational graphics, interactive media, and non-interactive media. As they say, a picture is worth a thousand words, yet some of these "pictures" rendered me speechless. The competition winners can be appreciated here, enjoy.

Imaged are two of my favorites. The first is called Visualizing the Bible. From the description on NSF's site: "Each bar on the graph along the bottom represents a chapter of the Bible; the bar length corresponds to the number of verses in the passage. The rainbowlike arcs represent references from a chapter in one book to a chapter in another." The second is called String Vibrations, it is a photograph of a cotton string attached to a tiny motor. The photographer forced an atypical torque in the string and the exposure lasted for two seconds. Make sure you see, "Mad Hatter's Tea" From Alice's Adventures in a Microscopic Wonderland and The Glass Forest.

The Feeling is (Washington) Mutual

Yesterday, JPMorgan Chase acquired the banking operations of Seattle-based Washington Mutual Bank. The Office of Thrift Supervision (OTS) closed WaMu late in the day after a run on its deposit accounts. The Federal Deposit Insurance Corporation (FDIC) took over as receiver. The FDIC sold nearly all of WaMu's operations to JPMorgan for $1.9 billion. The acquisition is expected to wipe out WaMu stockholders.

The JP Morgan web site hosts the deal docs for the asset acquisition. More info about WaMu's failure and receivership are at FDIC and Treasury. No insured depositor will lose a dime.

Some Damn Foolish Thing in the Balkans

That's what Bismark predicted would set off the war that seemed inevitable. The trigger turned out to be the assasination of Archduke Franz Ferdinand, heir to the Hapsburg throne. The assassins were seven young men. All were members of a secret Serbian nationalist movement. All had tuberculosis which was a death sentence in 1914. The rest, as they say, is history.

Two days ago, at a Brookings Institute conference on Turmoil in Housing and Financial Markets, former Treasury Secretary Lawrence Summers (now at Harvard's Kennedy School) observed that there is no single root cause of the current financial crisis and no simple single solution. The fix, he said, requires "multiple instruments targeted to multiple objectives." One response to the housing crisis currently getting most of the attention is to regulate institutions so they won't make mistakes again. People and businesses make mistakes and they always will, whether government regulates them or not. Summers offered another approach --reforming the financial system to make it safe for institutions to fail. The goal should be reduction of systemic, not individual risk of failure.

Summers noted that even without subprime mortgages, the US economy was still vulnerable to leverage bubbles and might still have found itself in crisis. Blaming the current financial crisis on submprime mortgages, he said, is like blaming World War I on the assassination at Sarajevo.

Where Did All The Capital Go?

On Monday, the American Bankers Association released a survey of banks to see what the government bailout of gse's (government sponsored enterprises) Fannie Mae and Freddie Mac will cost the banking industry. ABA found that 27 percent of banks surveyed hold preferred shares of Fannie and Freddie stock. Another 3.4 percent hold auction-rate securities backed by the GSE preferred stock.

What does this mean? ABA President Edward Yingling told the Treasury Department that the total loss to the banking industry is between $10 billion and $15 billion." Treasury's takeover and capital funding plan for Fannie and Freddie added an express government guarantee of GSE debt and mortgage backed securities. It left common and preferred GSE shareholders holding a bag of shares worth nearly nothing. In short, banks holding GSE preferred shares don't feel the least bit bailed out.

Federal regulators have described the GSE takeover plan as having only a minimal impact in the banking and thrift sector. Not so says the ABA. The survey reveals that 85 % of banks with GSE equity securities in their portfolios are community banks with less than $1 billion in assets,with the largest concentrations of affected banks in Massachusetts, Illinois, Connecticut, South Carolina, and Virginia. (The Independent Community Bankers of America has accused bank regulators of essentially marking little banks in a con to promote GSE stocks as safe investments.) Banks stuck with worthless GSE securities must offset their losses by reducing their loan portfolios. Yingling said: "The credit crunch will be immediate: with capital difficult to raise in the market today, banks will have no choice but to shrink in order to restore their capital-to-assets ratio to previous levels," he wrote.

Where did all the capital go? The ABA figures it this way. These days the average ratio of bank capital to loans is about $1 in capital to support $7.60 in loans. Doing the math, with every $ 1 million loss in capital value, banks will reduce the amount they are willing (and able) to lend to customers by about $7.6 million. Yingling said GSE losses will "restrain even the best banks in this country from making new loans."

Modern Reeves?

Today is Autumn Equinox, the official beginning of Fall and one of the two calendar days with equal amounts of sunlight and darkness. As Christianity spread throughout Europe, the pagan celebration of the Autumn Equinox was mixed with the feast of St. Michael the Archangel. St. Michael was seen as a protector against dark forces, and so it was appropriate to celebrate his feast on the day marking the transition to longer hours of darkness. Although St. Michael’s feast (Michaelmas) is now celebrated on September 29th, its connection to the Equinox remains, for both are celebrations of harvest and new beginnings.

Michaelmas, was recognized as both a day of obligation and a quarter day. It was one of the four days during the year that rents were collected, accounts rendered, new leases commenced, and annual dues paid. A Michaelmas custom worth noting is the election of a reeve from among the local serfs. The reeve’s duty was to oversee the completion of the harvest and account for any deficiencies to the landowner out of his own pocket. (Understandably, this was not a popular office.) Although we no longer live in an agrarian society, it seems to me that a reeve could be a useful corporate addition these days.

For more on the history of Michaelmas including some tasty-looking recipes, click here. The blackberry crumble certainly looks good!

Thrown

There are roughly fourteen-thousand newly minted J.D.’s each year. For as many lawyers as there are in the country (about 1.5 million according to the U.S. Census Bureau in 2007), there are probably as many ways to use a law degree. But figuring out how to use one's legal education can be stressful, and may often leave one feeling replete with self-doubt. Personally, I know the battle is between my ears; what my heart wants and what makes the most logical sense do not always coincide. In search of insight on the decisions in front of me, I have spent some time reflecting on the philosophy of Martin Heidegger. I find that thoughtful reflection on philosophy and theology are useful tools when anxiety begins to creep into my days.

Heidegger postulated that we are shaped by the environment into which we are born. In his terminology, we are all thrown (Geworfenheit) into the unique nexus of situations (“worlds”) within which we dwell. In Being and Time, Heidegger was concerned with the issue of "Being," specifically, “being qua being” and our self-sentience vis-à-vis the world. Heidegger’s notion of Being was inseparable from the world itself. To understand ourselves in this way, as "Beings-in-the-world," is to accept that no two individuals have shared the identical set of experiences; for this reason, we each see the world and react to it in unique ways.

For Heidegger, we exist in one of two states: authenticity or inauthenticity. Authenticity manifests through concern for the world and those in it. Fueled by the recognition and acceptance of our finitude, the authentic self embraces his uniqueness and turns his attention toward fulfilling his potential. Inauthenticity, on the other hand, results from the failure to differentiate oneself from others. While we exist in the world with others, we cannot exclusively be defined by others if we are to lead "authentic" lives. Often the external influences can become stronger and louder than the internal influence. The problem, as Heidegger pointed out, is that inauthentic existence is irresponsible—it deprives oneself of accountability.

In law school, as a third year student, much of the dialogue with colleagues centers on interviews and career aspirations. No doubt there is a hierarchy of prestige associated with the career paths we choose. For those among us who elect not to follow the route of traditional legal practice, the discussions can feel more like a personal justification than a thoughtful exchange. For me, the philosophical framework helps me to center my attention more productively. My telos must be on how to fulfill the roles for which I am best suited; I need to appreciate that I am on my own journey. And while it doesn't take Heidegger to explain "just because Sally does X, doesn't mean you should," sometimes in life, the truth is not so obvious.

Too Big To Fail or Just Too Big to Fail Quickly?

Last night around 10:20 p.m. news broke that the Fed agreed to loan $85 billion to American Insurance Group (AIG). This is the latest in a recent run of corporations that needed fast cash or went bankrupt.

As I understand the situation, the loan is to give AIG time to liquidate some of its assets and get a handle on things before paying the Fed back in two years time. I like this. I like it better than straight bailouts. I get that AIG failing overnight could shake consumer confidence and perhaps induce people to start dumping stock shares left and right. I also get that AIG is in a precarious position and needs to take steps to turn the Titanic around.

Hopefully, the loan will be paid back and this won't be another example of naked corporate welfare.

We Can Work It Out

I am taking Bankruptcy this term, yes, with the Red Lion herself, and for three weeks now, I can't seem to get the Beatles' "We Can Work It Out" out of my head when I read for class! It seems an appropriate anthem for a pre-petition debtor trying to avoid creditors' collection attempts. Strange how the mind works . . . In any event, it is a great song!

The Federal Tax Treatment of Palin's Per Diems

The Washington Post recently reported on the amount of per diem and family travel expenses that Sarah Palin billed to the state as governor.

Tax professors have questioned what the tax treatment of those reimbursements should be. I won't rehash the whole argument here, but this post and the comments (including some from me) should give you a sense of the issues.

Here Comes the "Party A"?

In May of this year, the California Supreme Court held, "that the California legislative and initiative measures limiting marriage to opposite-sex couples violate the state constitutional rights of same-sex couples and may not be used to preclude same-sex couples from marrying." In re Marriage Cases and Marriage by Any Other Name Not As Sweet. The decision has been heralded as a milestone victory for the civil rights of gay couples. Regardless of how you feel about the decision, what is troubling to me is the subsequent "slap" to those desiring to wed using the traditional marriage terminology.

When my husband and I applied for our marriage license (in California), we filled out our respective "bride" and "groom" sections. That is, sadly, no longer an option for couples applying for marriage licenses in California today. The form has been modified to say, "Party A" and "Party B," instead. The modification, would not be problematic if there remained the option to be designated "bride" or "groom," but in California, that does not seem to be an option anymore. Here is the excerpt from the story found on worldnetdaily.com:The couple had written the words "bride" and "groom" next to "Party A" and "Party B" because they wanted to be legally recognized as husband and wife. However, the Placer County marriage license was denied. "I received back the license and a letter from the Placer County Clerk/Recorder stating that the license 'does not comply with California State registration laws,'" Bird said in a statement from the Pacific Justice Institute. It was an "unacceptable alteration," the County Recorder's Office claimed the State Office of Vital Records determined.

Advancements in the civil rights of one group of people should not infringe on the rights of another group. If a couple desires to be legally recognized as a married couple using traditional marital terminology, I cannot understand why they would be precluded. Thoughts?

Return (Again) to the Golden Wedding Anniversary

Prof. Sidney DeLong of Seattle University School of Law posted this interesting question to the AALS Contracts list. Former Contracts students who recall Hamer v. Sidway, especially those who are now exploring Trusts and Estates, may want to join the fun:

Suppose that at the family celebration William Senior said: "I have made a will leaving $5000 to William on condition that at the time of my death, he has not smoked, drunk alcohol, or played cards for money." Willy forbears from vice but, unbeknownst to him, Senior changes his will to eliminate the bequest to Willy. At the time of Senior's death, does Willy have a claim? I assume that one must impute to Willy the knowledge that wills are revocable. Did uncle make a promise? Does the announcement of a conditional bequest in a will constitute a unilateral contract offer? If not, does Willy's foreseeable reliance on the announcement constitute grounds to enforce the gratuitous offer under [Restatement (2d)Contracts] section 45, 90, or 87? If Willy has a claim on these facts, I think the law of wills will tremble but that is not our concern, or is it?

Discourse, Please, Not Drama

Whether you like the personalities on either side, or the respective interests they represent: an African-American on the Democratic ticket, a woman on the Republican ticket, and two old white guys on both tickets, this election should not be about race, gender, age, style, pop culture popularity, celebrities, scandals, or the like. What this election should about are policies, and where the two parties' policies will take our country over the next four years.

The choice, as I see it, is clear: should the American government be responsible for helping the American people, or should the American people be left with the responsibility of helping the American people? If the former, your ticket is Obama-Biden, if the latter, your ticket is McCain-Palin. It has nothing to do with the people, the color of their skin, how many kids they have, or anything else. It has everything to do with whether you think government should solve American's problems, or whether you think that Americans with the help of other Americans around them should solve their problems.

Senator Obama and his wife, Michelle, are perfect examples of the success that is possible when you are surrounded by a caring and invested network of people (for most people this comes in the form of family). The Obamas did not succeed because of the government, they succeeded because of the dedication of their families and their own hard work. They got where they are, despite their humble beginnings, not because the government helped them, but because Americans around them helped them. Why they think that formula should change and somehow won't work for the next generation is not clear to me.

I believe that Americans are generous and if left more of their own money (rather than being taxed at high percentages) they will use that money to help their fellow Americans. Not for accolades, but for street cred, I want you to know where I am coming from and that I put my money where my mouth is. Every year for the past four years my husband and I have donated around 18% of our annual income. I was not born with a silver spoon in my mouth, I am first generation higher education and have done everything from delivering phone books for cash to working in a law firm. I, like the Obamas, have been supported by a network of caring Americans who helped me along the way, and my goal is to pay it forward.

The difference between Senator Obama and me is that he wants me to give the government my money in the form of taxes so he can pay it forward for me, to who he wants to, when he wants to, with no reporting back to me as to the success of or return on the investment. I, on the other hand, want to "invest" my philanthropy dollars into organizations and people that I know, from having my own boots on the ground, are making a difference and having an impact in people's lives. The more the government leaves in my pocket, the more I have to pay forward.

Government should build our roads, provide infrastructure for growth, and fend off our enemies at the borders and abroad. Other than that, the American people should be left alone to take care of themselves and each other. You know you can take care of your neighbor better than a government office can, that's common sense! You can do it, we all can do it, we don't need the government to do it.

I add the caveat that the Republican party is not exactly the party of less government interference these days. With recent bailouts, corporate welfare seems to be on the rise. The Republicans, however, are still on the whole less inclined towards socialism than Democrats.

Click here for a related article, "It's Not About the Issues."

Play Prisoners Dilemma

Had enough Super Mario Bros.? Try your hand at Prisoners' Dilemma. When you've played until you can't stand any more, read Robert Axelrod, The Evolution of Cooperation (Basic Books, NY 1993) or The Arithmetics of Mutual Help, by Martin Nowak, Robert M. May, and Karl Sigmund, in Scientific American (June, 1995, pp 76-81).

Fershee Op-Ed

Former Red Lion guest blogger, Josh Fershee, has an Op-Ed on government bailouts in the Lansing State Journal today.

International insolvency law (and more signs)

An interesting piece of news on the international front just crossed my desk (dated July 29, but it is a UN document, not an organization known for intemperate speed). It reports that UNCITRAL, the UN Commision on International Trade Law promulgated a model law on cross-border insolvency (1997) and a legislative guide on insolvency law (2004), among many other documents and reports. The news is that an Insolvency Law Working Group is preparing for its 35th meeting (Nov. 17 to 21 in Vienna). High on the agenda are guidelines for multinational insolvencies and corporate bankruptcy. The U.S. is a member of the 60 state working group but the American negotiators aren't identified. Here are all the UN papers and background on the project: http://www.uncitral.org/uncitral/en/commission/working_groups/5Insolvency.html

Pivoting to antitrust, the UN Conference on Trade & Development (UNCTAD) offers technical assistance on law and policy and has a draft model antitrust law. But, the UN is not in the forefront of global developments in this field. Antitrust harmonization (don't say convergence) is an important work-in-progress and some 90 national antitrust agencies established their own virtual organization outside the UN or any other supra-national entity. This group has been meeting - in person and virtually - for the past 7 years to hammer out areas of agreement, establish benchmarks and recommend consistent procedures for mergers, monopolies, cartels and other substantive issues. Gratifying progress is being made on many issues.

So, bankruptcy specialists - do you predict that the UNCITRAL model law will be influential? Is it necessary? Is UNCITRAL more authoritative in your field than UNCTAD has been in antitrust?

Finally, international signage seems to be a hobby for lots of travelers. Here are some of my favorites from China:





This apparently illustrates the proper form for falling into the lake.





It says, "Old person, children need to be led by adult to take escalator."

The Great Vegan Honey Debate

Here. Vegans, Honey, Flexitarians. Fascinating.